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May 20, 2013

Pakistan’s New Leader Heartens Investors

While the news of Nawaz Sharif’s victory in last week’s general election in Pakistan sent out a wave of optimism and hope for the future of the country, few would deny that Pakistan’s new leader has his work cut out for him.

Pakistan’s economy is in dire straits. The country’s foreign exchange reserves have dwindled to dangerously low levels; inflation, unemployment and corruption are rampant; the country is facing a terrible energy crisis and the ongoing geopolitical tension, sectarian and political violence have all but scared investment away.

Yet the election on May 11, which had a record turnout and marked the first-ever transition from one democratically elected government to another, was a positive step for Pakistan at this crucial time and many foreign investors believe that Sharif, who was prime minister before the 1999 military coup led by Gen. Pervez Musharraf, is the best man to get Pakistan back on track, economically and otherwise.

The news of his victory sent the Karachi stock market soaring, and it should continue to see some good support going forward, since Sharif’s victory removes a certain degree of uncertainty for investors, said Daniel Broby, CIO of Silk Invest, a London-based firm investing in frontier markets, Pakistan included.

The prospects for Pakistan’s economy also look more positive: Broby highlighted better times for the manufacturing sector, which, he said, should benefit from lower taxes under the new government. And Sharif is a businessman and has always been pro-enterprise, so there’s a chance for much-needed privatization in bulky, state-owned enterprises as well.

Sharif’s victory also increases Pakistan’s chances of inking a new deal with the International Monetary Fund (IMF), Broby said. Pakistan badly needs IMF funding in order to stabilize its external finances and set up the policy framework necessary for fiscal and energy sector reforms, among others.

However, Pakistan’s reliance on IMF and other external sources of funding is also one of its greatest drawbacks, and true economic change can only come about if that dependence decreases and there’s an improvement in the country’s fiscal situation.

“Less than 0.9% of [Pakistan’s] population pays taxes, so the fiscal situation is always out of whack, and relying on handouts from foreign governments to barely survive is one of the main reasons of the ongoing chaos in the country,” said Sanjeev Kumar, director and group CIO at consulting firm Delamore & Owl in London, “so Mr. Sharif and his coalition partners will need to work together and hopefully make this opportunity count.”

Kumar is one of many investors who believe that Pakistan would benefit greatly from closer ties with its neighbor and nemesis, India. This is something that Sharif has said he would like to work on and that India’s leadership is apparently not averse to, either.

The fast-track creation of an India-Pakistan trading union, for example, would be a good step for Pakistan, Kumar believes, and if the country can agree to a currency swap with the Reserve Bank of India for not less than 1% of its 2012 GDP of $240 billion, this would provide some support to the Pakistani rupee, which has lost around 45% in value.

Working out an arrangement to allow companies from Pakistan to list in the Indian market and vice versa, and enabling Indian companies to invest in Pakistan, would also help both the economy as well as Pakistan’s prospects for attracting investment from other parts of the world, Kumar said.

But none of these measures, if they are even in the offing, are going to happen easily, not least given Pakistan and India’s highly checkered and extremely tense relationship in the 66 years since both countries gained their independence from Great Britain.

And even if both Indian and Pakistani leaders agree to work closely together, there are many different factors and numerous moving parts at play—Afghanistan, the Taliban, Pakistan’s army and the country’s rather tense relationship with the United States, to name a few—that make achieving stability in Pakistan a challenge.

Sharif does have a chance, though, Kumar believes, to “rebrand” Pakistan and hopefully make some changes that would not only benefit the country but other nations that deal with it as well.

 

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